Ericsson Throws Cold Water on 5G Hype

Redmarket

By: R. Scott Raynovich

Ericsson (ERIC) once again revised its long-term sales forecast down as it expects deployment of next-generation 5G mobile Internet service to play out more slowly. The company detailed its ongoing overhaul at a Capital Markets Day in New York on Wednesday, in addition to providing a quarterly analyst briefing this morning.

The Stockholm-based company still sees 5G and IoT technologies driving growth in the years ahead, but it doesn't see it adding huge numbers to the top or the bottom line for a long time. The company has lowered its forecast through 2020 and doesn't see any meaningful revenue growth until after that, when deployments of next-generation radio access network (RAN) services such as 5G and IoT take hold.

Ericsson now expects annual revenues of SEK 190 billion to SEK 200 billion ($22.7 billion to $23.9 billion) by 2020, compared to sales of SEK 211 billion ($25.2 billion) in the last 12 months. The company forecasts a 10% operating margin by 2020. In morning trading in New York, Ericsson shares on the the Nasdaq Exchange fell .25 (3.98%) to $6.03 on the news.

In another shocker, Ekholm told analysts that the company won't make its $1B revenue target in the partnership with Cisco -- which Futuriom noted months ago was pretty much impossible

Overall, Ericsson's numbers are a disappointing signal about the hype for 5G, which is constantly trumpeted in any forum about telecommunications technology. It also demonstrated the massive challenges for equipment providers in the telecom sector. The service provider sector is in quite a lull, with capital spending across the industry flat to down, and Ericsson's signals indicate that 5G will not be the life raft that many in the industry make it out to be. 

Some Wall St. analysts that attended the meeting in New York say Ericsson's message confirms skepticism about 5G markets. 

"We are 5G skeptics, and while we believe operators will spend on the technology, it won't move the needle for vendors for years and is currently a technology seeking a market," wrote Raymond James analyst Simon Leopold in a research note this morning. "Ericsson's lack of diversity leaves it beholden to wireless carrier spending trends. Although the lower outlook and pushout for margin improvement is discouraging, the exit of low margin projects and eventual exit of the Media unit put Ericsson on a path to meaningfully improve metrics."

Meahwhile, Ericsson CEO Börje Ekholm continues to shuffle the decks. As industry publication Light Reading reported, he has relieved top executives Jan Frykhammar and Magnus Mandersson of their duties, replacing them with a new executive vice president, Fredrik Jejdling, who is currently head of Ericsson's Business Area Networks division. Frykhammar had been with Ericsson for 26 years, and served as interim CEO while the company was searching to replace former boss Hans Vestberg.

With Ekholm still using language such as "secure the ship," one needs to start wondering whether it's possible for the global technology company to put growth on hold for two to three years, while innovation accelerates in other markets. 

The bottom line? Don't look for a lot of good news from Ericsson or major telecom equipment suppliers in the next 12 to 24 months -- and turn a skeptical eye toward those 5G forecasts. On the financial side, Ericsson already has its work cut out for it as it is targeting gross margin improvement while revenue is still declining. 

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